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Occasional Paper Series
A review of economic analyses on the potential impact of
Brexit
International Relations Committee Brexit Task Force
No 249 / October 2020
Disclaimer: This paper should not be reported as representing
the views of the European Central Bank (ECB). The views expressed
are those of the authors and do not necessarily reflect those of
the ECB.
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A REVIEW OF ECONOMIC ANALYSES ON THE POTENTIAL IMPACT OF BREXITA
review of economic analyses on the potential impact of Brexit –
Contents
1
Contents
Abstract 2
Non-technical summary 3
Foreword 6
1 Introduction: the implications of Brexit for the economic and
financial relationship between the EU and the United Kingdom 7
1.1 The decision to exit the EU and its implications 7
1.2 An account of the negotiation process 9
1.3 Possible scenarios for the Brexit process 13
2 The economic and trade impact of Brexit 17
2.1 A review of the Brexit-related economic literature 18
2.2 Estimates of tariff and non-tariff barriers to trade after
Brexit 24
2.3 Model-based assessments of trade and migration channels
35
2.4 A tentative exploration of the effects of Brexit on foreign
direct investment vis-à-vis the United Kingdom 46
2.5 Country evidence 48
3 Conclusions 57
References 61
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A review of economic analyses on the potential impact of Brexit
– Abstract
2
Abstract
This paper summarises the economic analyses of the potential
impact of Brexit on the United Kingdom, European Union (EU) and
euro area performed by members of and contributors to the Brexit
Task Force, a group reporting to the International Relations
Committee of the European System of Central Banks. The studies were
carried out between 2017 and the initial months of 2019 and have
been independently published by the authors. The aim of this
Occasional Paper is to present the studies in an organic manner,
highlighting common features and results.
The different pieces of analysis employ a wide range of methods
to (i) investigate the impact of Brexit on the economy and trade,
(ii) assess possible scenarios for the bilateral relationship
between the EU and the United Kingdom after Brexit and (iii)
investigate the role of the main macroeconomic channels of
transmission of the Brexit shock: trade (including the role of
European value chains), migration and foreign direct investment.
Other transmission channels such as financial linkages or
uncertainty, and the financial stability implications of Brexit
were not covered in the studies reviewed here.
The results of these studies provide additional quantitative and
qualitative foundations for some widely shared conclusions on the
consequences of Brexit. The cost of Brexit in terms of gross
domestic product loss is estimated to be significantly greater for
the United Kingdom than for the euro area and the EU as a whole.
This result is consistent across models, methodologies and
scenarios and applies to both the trade and migration channels.
Nevertheless, the results differ across individual Member States.
Ireland would be particularly affected because of its close ties
with the UK economy. Given the estimated costs of withdrawal, the
closer the final relationship is to the United Kingdom’s EU
membership, the lower the macroeconomic costs of Brexit will be.
The barriers to trade and investment between the EU and the United
Kingdom that are expected to arise after Brexit will increase the
costs of bilateral trade, as well as damaging inter-European
production value chains and the allocation of capital across Member
States.
KEY WORDS: Brexit, trade, migration, global value chains,
FDI
JEL codes: F14, F15, F21, F22
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A review of economic analyses on the potential impact of Brexit
– Non-technical summary
3
Non-technical summary
On 29 March 2017 the Government of the United Kingdom notified
the European Council of its intention to withdraw from the European
Union (EU) following the result of the referendum held in June
2016. Negotiations between the United Kingdom and the EU started in
June 2017. In November 2018 the parties reached agreement on two
texts: a Withdrawal Agreement governing the terms of United
Kingdom’s exit from the EU and a Political Declaration on the
framework for the future relationship. However, the UK Parliament
failed to ratify the Withdrawal Agreement before the initial
deadline for withdrawal, specified by the EU Treaties as being two
years after the withdrawal notification (on 29 March 2019). The
deadline for the United Kingdom’s exit from the EU was subsequently
postponed three times to avoid a no-deal Brexit, and both the
Withdrawal Agreement and the Political Declaration had to be
renegotiated in October 2019. Brexit finally took place on 31
January 2020, and negotiations on the future relationship started
shortly after, given that the transition period is due to end by 31
December 2020. Nevertheless, uncertainty remains over the final
outcome of this process.
This Occasional Paper summarises the contributions to the
analysis of the economic consequences of Brexit made by a group of
economists from different central banks of the European System of
Central Banks (ESCB) under the umbrella of the Brexit Task Force, a
group reporting to the International Relations Committee of the
ESCB. The studies presented in this Occasional Paper were conducted
between 2017 and the initial months of 2019 and are listed in the
first part of the References section. Hence, these results do not
constitute the ECB’s own assessment of the potential economic
impact of Brexit.
The papers employ a wide range of methods to investigate the
economic and trade impact of Brexit. These methods include a
literature review, the estimation of gravity equations, simulations
with open-economy macroeconomic models, (New Keynesian) dynamic
stochastic general equilibrium models and computed general
equilibrium models. Statistical analysis is also used, along with
an interdisciplinary approach combining economic, institutional and
legal tools.
Different scenarios for the bilateral relationship between the
EU and the United Kingdom after Brexit are investigated, taking as
their baseline the situation pre-Brexit. Overall, two main types of
stylised scenario are considered. The first is a final relationship
characterised by the application of World Trade Organisation (WTO)
most-favoured-nation (MFN) terms of trade (the relationship that
would ensue from a no-deal Brexit after the transition period). The
second is the establishment of a free trade agreement (FTA) of some
kind between the EU and the United Kingdom. It is worth noting that
the assessments refer mainly to the medium and long-term impact of
Brexit and do not investigate the possible short term disruptions
of a no-deal exit (a “cliff-edge” or a “hard” Brexit).
Three main channels of transmission of the Brexit shock are
considered: trade in goods and services (including the
interlinkages between countries through production
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A review of economic analyses on the potential impact of Brexit
– Non-technical summary
4
value chains), migration and foreign direct investment (FDI).
These transmission channels are closely related to the four
fundamental freedoms of the EU Single Market: free movement of
goods, services, people and capital. Other channels, such as
financial linkages or uncertainty are not considered in this
analysis. These are potentially very relevant transmission channels
but they are complex to specify and their introduction would
require a different set of analytical tools. Likewise the financial
stability implications of Brexit are not assessed in the set of
papers reviewed here.
The main insights into the impact of Brexit obtained from the
papers reviewed can be described by going through the different
transmission channels considered.
It is clear that Brexit will give rise to trade barriers – in
the form of both tariffs and non-tariff barriers (NTBs) – between
the EU and the United Kingdom. If no trade agreement is struck,
exporters from both areas will face MFN tariffs in their bilateral
trade. Tariffs will differ depending on the specific sectors
involved in trade but are likely to be significantly higher on
average for UK imports than for EU imports. This general conclusion
remains the same if we take into consideration country
interlinkages through production value chains – although the
indirect effect of these interlinkages on average tariffs is higher
for the EU. In the absence of an FTA, NTBs will also increase, with
an uneven impact across sectors and Member States. It is important
to note in addition that the vulnerability of Member States’
productive systems to Brexit will depend not only on their sectoral
specialisation but also on the characteristics (size, efficiency,
external diversification) of the firms directly exposed to trade
with the United Kingdom, as the analysis shows in the case of
Spain.
The simulations of the impact of higher trade barriers on the UK
and EU macroeconomic outcomes – performed with different types of
models and scenario specifications – consistently show that the
economic consequences are more negative for the United Kingdom than
for the euro area. The exercises also illustrate that the
macroeconomic impact would be smaller under an FTA. However,
average EU results cannot be extrapolated to individual Member
States: specific analysis focusing on the Irish economy shows a
very significant effect on this economy resulting from the United
Kingdom’s withdrawal. This effect is due to Ireland’s geographical
proximity and to the particular situation with the Irish/Northern
Irish land border. Another interesting set of results relates to
the effectiveness of monetary policy in softening the impact of
Brexit in the United Kingdom. This will depend on the nature of the
shock: a pure supply shock cannot be effectively addressed through
demand policies. Finally, estimates of steady-state welfare losses
point again to higher losses for the United Kingdom than for the
EU, albeit with significant variation among EU Member States.
Turning to migration flows, the free movement of people between
the United Kingdom and the EU will be hampered, with (possibly
significant) consequences for potential output and the labour
market. Results point to a significant fall in migration flows from
the EU to the United Kingdom after Brexit. The intensity of the
fall would be similar under a WTO scenario to that under an FTA
scenario, as the migration regime is not necessarily linked to the
trade regime. Conversely, Brexit would lead to an increase in net
migration flows towards the EU, helping to soften the negative
shock of disintegration. The negative effect of lower immigration
on the United Kingdom’s
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A review of economic analyses on the potential impact of Brexit
– Non-technical summary
5
macroeconomic performance would be lower than the impact through
the trade channel but would not be insignificant.
On FDI, the third transmission channel analysed in the papers,
the analysis finds some preliminary evidence of a slowdown in FDI
flows both in and out of the United Kingdom after the referendum in
June 2016. The lower FDI may reflect the possible loss of both the
EU’s single passport for services and UK firms’ access to the
Single Market. It may also reflect the likely emergence of trade
barriers, making the United Kingdom’s participation in EU
production chains less straightforward.
The broad set of results coming from the papers reviewed in this
publication are highly consistent both among themselves and with
the evidence reported by other studies (see Bisciari, 2019). They
point to the high costs of withdrawal for the UK economy – far
outstripping the aggregate impact on the EU or the euro area
economies. Nevertheless, looking at the Member States individually,
the results give a more nuanced picture, as the particular case of
Ireland illustrates. It should also be recognised that estimates of
the macroeconomic impact of Brexit have a low degree of precision.
As mentioned before, some potentially important aspects linked to
confidence effects or to the financial sector channel are complex
and difficult to introduce into the models. The potential policy
reaction across a wide array of policy instruments, particularly in
the case of the United Kingdom, is another consideration not
adequately taken into account in the quantitative analysis.
Obviously, given the estimated costs of disintegration, the
closer the final relationship is to the United Kingdom’s EU
membership, the lower the macroeconomic cost of Brexit will be.
This reflects the negative consequences of establishing barriers to
the free circulation of goods, services, people and capital.
Hampering trade and investment will increase the costs of bilateral
trade, with an impact on production interlinkages and value chains.
It will affect the cross-border allocation of capital, leading to
quite significant losses for some countries and sectors. Indeed, a
common finding of the papers is that Brexit will reduce the gains
from trade on both sides of the Channel. In the long run, this will
result in a lower level of gross domestic product for the United
Kingdom’s economy and – to a lesser extent – for the EU economy as
well.
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A review of economic analyses on the potential impact of Brexit
– Foreword
6
Foreword
Since the Brexit referendum – more than four years ago – Brexit
has become an increasingly important subject of economic research.
The uncertainty related to the United Kingdom’s withdrawal from the
European Union (EU) has generated a continuous stream of news,
commentary and analysis. Flowcharts of possible Brexit scenarios
have been designed and revised, pointing to different varieties of
“hard” and “soft” Brexit, as the negotiations and the political
background have changed over time. While a Withdrawal Agreement has
now entered into force, the terms of the future relationship
between the EU and the United Kingdom are still being negotiated.
This is happening against the overwhelming background of the
COVID-19 pandemic, which has brought about its own uncertainty, and
a global recession.
The European Central Bank and the national central banks of the
European System of Central Banks (ESCB) have invested significant
efforts into analysing the implications of Brexit from an economic,
financial stability and trade relations perspective, in addition to
their continuous monitoring of political and institutional
developments. The Brexit Task Force (BTF) of the ESCB’s
International Relations Committee was established with the specific
purpose of monitoring and reviewing the process of the United
Kingdom’s withdrawal from the EU from a holistic point of view,
working closely with other ESCB committees.
In particular, the analysis of the economic and trade
consequences of Brexit raised many challenges. In some cases,
existing models and forecasting approaches revealed their
limitations and had to be updated. This publication is the result
of the cooperation and exchanges between researchers across the
ESCB in their efforts to analyse the economic and trade impact of
Brexit. It was with this aim that the BTF promoted the production
of an impressive set of papers, thereby contributing to the
rigorous analysis of the economic and trade consequences of Brexit
for the economies of the EU-27 and its Member States, the euro area
and the United Kingdom.
Irrespective of the outcome of the negotiations on the future
relationship, Brexit-related analysis and research will remain a
significant topic for the European Central Bank and the national
central banks of the ESCB in the years to come.
We would like to thank Pilar de L’Hotellerie-Fallois and Filippo
Vergara Caffarelli for their leadership in organising and inspiring
the cooperation between central banks on these topics and for their
work in pulling together this Occasional Paper. We would also like
to thank the authors of the papers reviewed in this publication for
their contributions.
Gilles Noblet (European Central Bank) and Hans Geeroms
(Nationale Bank van België/Banque Nationale de Belgique), Co-Chairs
of the Brexit Task Force of the International Relations Committee
of the ESCB
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A review of economic analyses on the potential impact of Brexit
– Introduction: the implications of Brexit for the economic and
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1 Introduction: the implications of Brexit for the economic and
financial relationship between the EU and the United Kingdom
This Occasional Paper surveys the analyses performed by a group
of economists from several central banks of the European System of
Central Banks (ESCB) – under the guidance of the Brexit Task Force
(BTF), a group reporting to the International Relations Committee
(IRC) – focusing on the economic and trade consequences of Brexit
for the economies of the United Kingdom, European Union (EU) and
euro area. This collective effort resulted in a series of studies
carried out between 2017 and the initial months of 2019 and
published separately.
The authors of these papers employed a wide range of research
tools to investigate the impact of Brexit on the economy and trade
under different possible scenarios for the bilateral relationship
between the EU and the United Kingdom after Brexit. They assessed
the role and strength of different channels of transmission of the
Brexit shock, in particular trade, migration, foreign direct
investment (FDI) and global value chains (GVCs). It is important to
notice that the mandate to analyse the economic and trade
consequences of Brexit did not include the implications of Brexit
for financial stability, which would have required - in any case -
a different methodological approach. Likewise other potentially
relevant transmission channels of Brexit such as financial linkages
or confidence effects were not included in the studies reviewed as
they are not easily incorporated into the analytical tools used to
estimate the economic and trade impact.
This first chapter aims at providing an adequate institutional
context for the analysis of the economic impact of Brexit at the
time the studies reviewed in this Occasional Paper were performed.
In order to do that, the chapter describes the Brexit negotiations
in a synthetic way, focusing on how this process translated into a
set of possible Brexit scenarios and the main elements behind those
scenarios.1 Chapter 2 is devoted to presenting the impact of Brexit
on the economy and trade by pulling together the results of the
papers mentioned above. Chapter 3 concludes with the main lessons
learned from this analysis.
1.1 The decision to exit the EU and its implications
The referendum on the exit of the United Kingdom from the EU
took place on 23 June 2016. The consultation was the result of an
electoral promise made by Prime Minister (PM) David Cameron during
the 2015 general election, which he won with an absolute majority.
The unexpected outcome of the referendum in favour of leaving the
EU (by
1 The rest of this introductory chapter draws on (i) the BTF
reports sent to the IRC between September
2017 and June 2020 which summarise the discussions and work of
the task force and (ii) analysis by the Banco de España (see Vega
Croissier (coordinator), 2019).
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52% to 48%) led to the resignation of David Cameron – who had
campaigned in favour of staying in the EU – and the appointment of
Theresa May as the new PM.
In order to fulfil the mandate of the referendum result, PM May
activated Article 50 of the Treaty on European Union (TEU), which
governs the withdrawal process, in March 2017. The clock began to
count down on the two-year period allowing for the effective
withdrawal of the United Kingdom, with 30 March 2019 set as the
latest date for it to take place. This period could only be
prolonged by a unanimous decision of the European Council or,
alternatively, by the United Kingdom revoking its decision to exit
the EU.2
A crucial issue for grasping the consequences of Brexit for the
EU and the United Kingdom economies is, of course, the type of new
relationship that will exist between the two parties after the
exit3. This issue has been a major source of uncertainty during
Brexit negotiations. The economic integration among EU Member
States is constructed on the basis of the Single Market – which
entails the four fundamental freedoms (free movement of goods,
services, capital and persons) – and the Customs Union. Once
Article 50 was activated, a range of alternatives was foreseen for
the future relationship between the United Kingdom and the EU.
These alternatives may be described in terms of the different
regimes that the EU has used in the past to build its relationship
with third countries.
The existing regimes represent different degrees of detachment
from the Single Market and/or the Customs Union, as illustrated in
Figure 1. The European Economic Area (EEA), which includes Norway,
Iceland and Liechtenstein, represents one of the closest
relationships4 between the EU and third countries, with
participation in the Single Market but not in the Customs Union,
which implies the existence of customs checks at the borders. The
cases of Turkey (which has a customs union arrangement5 with the EU
but is not in the Single Market) and Switzerland (which has a
variety of agreements at the sectoral and country level) represent
tailored arrangements. Free trade agreements (FTAs) similar to the
one signed with Canada (the Comprehensive Economic and Trade
Agreement, CETA) operate outside the Single Market and the Customs
Union but allow for a substantial reduction in trade barriers for
most goods and selective access to services. They also include
aspects related to investment and public procurement. Finally,
should the parties not be able reach an agreement, their trade
relationship after Brexit would be governed by the World Trade
Organisation (WTO) rules. Most-favoured-nation (MFN) tariffs and
non-tariff barriers (NTBs) would apply to bilateral EU-UK trade in
goods and services.
2 This possibility was recognised by the Court of Justice of the
European Union in the judgment in Case
C-621/18 of 10 December 2018. 3 Beyond Theresa May’s “Brexit
means Brexit” statement. 4 An even closer relationship has
previously been mooted, namely the so-called Norway+ or Common
Market 2.0 scenario, which combines the Single Market with a
customs union arrangement. 5 The customs union arrangement does not
include all goods, as agri-food is not completely liberalised.
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Figure 1 Existing models for the post-Brexit EU-UK relationship
(September 2017)
Notes: CU stands for customs union arrangement, RoW stands for
rest of the world, R.O. stands for rules of origin. (*) Except RoW
countries covered by an FTA. (**) CU only covers merchandise trade;
WTO rules will apply to trade in services.
1.2 An account of the negotiation process
Negotiations between the United Kingdom and the EU started in
June 2017, three months after the activation of Article 50 of the
TEU.6
The United Kingdom’s negotiating position, as established by the
PM and members of the Government, was articulated around several
“red lines” – control over immigration, an end to the United
Kingdom’s “vast” contributions to the EU budget and an end to the
jurisdiction of the Court of Justice of the European Union (CJEU) –
and around the aspiration of the United Kingdom to sign its own
trade agreements. For these conditions to be met, the United
Kingdom would have to exit the Single Market and the Customs Union.
This meant that an FTA with the EU was the most likely form of
future relationship, as illustrated in Figure 2.
The EU’s position in the negotiations was established through a
series of guidelines for the negotiating team7, which were approved
by the European Council. These guidelines included the need to
achieve substantial progress on the separation agreement (or
Withdrawal Agreement, WA) before starting to negotiate the new
6 In the intervening period, PM May had called a general
election in the United Kingdom in which the
Conservative party lost its absolute majority. The UK Government
then secured a confidence and supply agreement with the Northern
Irish Democratic Unionist Party (DUP) to obtain the necessary
majority in the House of Commons.
7 On EU side, negotiations were entrusted to the team set up by
the European Commission, namely the Task Force for the Preparation
and Conduct of the Negotiations with the United Kingdom under
Article 50 TEU (TF50), led by Chief Negotiator Michel Barnier. TF50
liaised in turn with a task force led by Didier Seeuws, reporting
to the Secretary-General to the Council of the European Union.
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relationship, the indivisibility of the four freedoms, the
impossibility of participating in the Single Market on a
sector-by-sector basis (“no cherry-picking”) and maintaining an
open border between Ireland and Northern Ireland.
Figure 2 Possible institutional scenarios according to the
original UK Government red lines
Source: European Commission (2017).
Accordingly, the negotiation schedule was divided into two
phases, as described in Figure 3. Phase 1 was to be devoted to
negotiating the terms of the withdrawal, with a specific focus on
three issues: (i) the rights of EU citizens in the United Kingdom
and of UK citizens in the EU, (ii) the settlement of the United
Kingdom’s financial obligations towards the EU and (iii) finding a
solution for an open border between Northern Ireland and Ireland.
The aim was to achieve “substantial progress” in all three areas
before starting Phase 2.
Phase 1 lasted until the end of 2017. In its December 2017
meeting, the European Council decided that “sufficient progress” on
the negotiation of the withdrawal terms had been achieved, which
paved the way for the start of Phase 2 in January 2018. Of the
three issues negotiated in Phase 1, the agreement around the Irish
border proved to be the most contentious. To ensure that
“sufficient progress” had been made on this issue, the UK
Government undertook to find a “specific solution” within the
framework of the future relationship; a default option (“backstop”)
was to be included in the WA, under which Northern Ireland would
maintain full regulatory alignment with the rules of the Single
Market and the Customs Union. Over the months that followed, the
proposals put forward by the UK Government for this “specific
solution” were deemed to be non-viable by the EU negotiators, and
the precise configuration of the backstop in the WA remained a bone
of contention until the autumn of 2018.
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Figure 3 Timeline of negotiations (June 2018)
Source: European Commission.
The second phase of the negotiations took place during 2018.
These negotiations were carried out on three fronts: (i) the
finalisation of the legal terms of the WA, with a special focus on
the Irish border issue; (ii) the characteristics of the transition
period, to be included in the WA; and (iii) the scoping of the
future relationship in a PD.
The European Council issued new guidelines on the future
relationship in March 2018, calling for “as close as possible a
relationship” with the United Kingdom. The guidelines confirmed the
need to uphold the integrity of the Single Market and the Customs
Union and to preserve the autonomy of the EU decision-making
processes. Meanwhile, the position of the UK Government towards the
future relationship was initially defined by PM May in March 2018
(in a speech that she gave at Mansion House, the official residence
of the Lord Mayor of London) and further clarified and modified in
a White Paper (called “the Chequers plan”) published in July 2018.
The speech confirmed that the United Kingdom aimed to take back
control of laws and borders by leaving the Single Market, the
Customs Union and the jurisdiction of the CJEU, without abandoning
the idea of frictionless trade with the EU.
It is worth mentioning that one important issue on which the
United Kingdom changed its position on the future relationship in
the summer of 2018 was financial services. By going from the
previous proposal to establish treaty-based mutual recognition
mechanisms (something rejected by the EU negotiators) to a
framework built around the EU’s existing equivalence frameworks,
the United Kingdom paved the way for a closer alignment between the
negotiating positions on this point.
The negotiation process proved to be difficult, and the
uncertainty over the final outcome persisted right until the end.
Agreement between the UK Government and the EU on the WA and the PD
was finally reached on 13 November 2018. On 25 November 2018, the
European Council endorsed the WA and approved the PD. In
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principle, this left enough time for ratification by the
European and UK Parliaments before the scheduled Brexit day of 30
March 2019.
The November 2018 WA provided for a transition period until the
end of 2020 that could be extended by up to two years to the end of
2022. During this period, the United Kingdom would continue to be
part of the Single Market and the Customs Union. Then, unless and
until a trade agreement was reached, a backstop would come into
effect for Ireland in the form of a single customs territory
between the United Kingdom and the EU-27. This would consist of a
customs union arrangement and level playing field safeguards.
Additional regulatory alignment provisions for Northern Ireland
would keep in place full access to the Single Market for goods,
avoiding the need for tariffs, quotas or checks on rules of origin
at the Irish border.
For the future economic relationship between the EU and the
United Kingdom, the PD established “the parameters of an ambitious,
broad, deep and flexible partnership across trade and economic
cooperation” akin to a comprehensive FTA. For trade in goods, a
“free trade area, combining deep regulatory and customs
cooperation” was envisaged. On financial services, the parties were
assured that the future relationship would be based on equivalence
decisions taken independently by them, with full respect for their
regulatory autonomy. The PD foresaw the possibility of exchanging
information, ensuring transparency and conducting consultations on
each side’s regulation. For other services, trade liberalisation
well beyond WTO commitments was foreseen. Negotiations on the
future relationship could only start after Brexit.
Although the agreement reached in November 2018 was endorsed by
the UK Government and the European Council, the package (WA and PD)
failed to be approved by the parliaments. The UK Parliament
rejected it three times owing to strong opposition to the Irish
backstop, so the package was not even submitted to the European
Parliament, which was the last step before final approval.8 In the
end, a no-deal Brexit was narrowly avoided by the European
Council’s granting two consecutive extensions of the Article 50
deadline, first to 12 April 2019 and then to 31 October 2019.
Over the following months the Brexit process came to a
standstill as political developments in the United Kingdom led to
the replacement of Theresa May as PM by Boris Johnson in July 2019.
The change in the UK Government brought with it a substantial
change in the United Kingdom’s Brexit strategy. The EU agreed to
renegotiate specific parts the package, and on 17 October 2019 the
EU and UK negotiators reached an agreement on revised versions of
the WA and the PD, which were endorsed and approved by the European
Council of 17-18 October 2019.
The main changes introduced to the WA concerned the Protocol on
Ireland and Northern Ireland. Instead of the backstop, the parties
agreed on a permanent solution to avoid a hard border on the island
of Ireland. According to this solution, Northern Ireland will
legally remain part of the United Kingdom’s customs territory and
apply the United Kingdom’s customs and product standard rules, but
it will also remain aligned 8 A last-minute agreement between the
UK Government and the EU over an additional interpretative
instrument related to the WA and a joint statement supplementing
the PD and clarifying some aspects of the backstop, reached in
March,, was not enough to secure approval by the UK Parliament.
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with a set of Single Market regulations. If goods entering
Northern Ireland from the rest of the United Kingdom are destined
for the EU, they will be subject to the EU customs and regulatory
checks. Otherwise, if they are destined for Northern Ireland’s
local market, either they will face no customs or regulatory
checks, or they will be eligible for a reimbursement of the EU
tariffs applied to them. The revised Protocol includes a consent
mechanism whereby the Northern Ireland assembly will be required to
vote on the continued application of the Protocol every four
years.
The revised PD sets the conditions for a looser future
relationship between the EU and the United Kingdom than the one
negotiated by Theresa May’s government, and it explicitly states
that the future relationship on goods and services will take the
form of an FTA.
The UK Parliament rejected the possibility of approving the new
WA in an accelerated procedure before 31 October 2019, the Article
50 deadline, and the UK Government asked for a further extension of
the deadline. Such an extension, to 31 January 2020, was granted by
the European Council on 29 October 2019. Meanwhile, the UK
Parliament passed a law calling early elections on 12 December to
break the political gridlock. The Conservative Party won the
general elections by a large majority, and Boris Johnson was
confirmed as PM with a renewed mandate to finish Brexit.
The EU (Withdrawal Agreement) Bill was eventually approved by
Parliament and received Royal Assent on 23 January 2020. The
process of ratification by the EU was smooth: after the
Constitutional Affairs Committee voted in favour of a positive
recommendation regarding the WA, the European Parliament gave its
consent on 29 January 2020, and the Council finally adopted the
decision to conclude the Agreement by written procedure on 30
January.
The United Kingdom exited the EU on 1 February 2020 and it is
expected that the transition period will irrevocably end by 31
December 2020.9 Negotiations on the future relationship started
shortly after Brexit took place. Nevertheless, in September 2020
such negotiations continue to be surrounded by uncertainty, given
that the positions held by the parties on some core issues are
still wide apart. Indeed, it cannot be ruled out that an agreement
is not reached, with economic consequences that would be similar to
a no-deal Brexit.
1.3 Possible scenarios for the Brexit process
The papers reviewed in this Occasional Paper were written during
the negotiation process, between 2017 and the first months of 2019.
Although the final version of the PD points towards an FTA as the
targeted model for the future relationship (barring a no-deal
Brexit at the end of the transition period), over the two-year
negotiation process there was high uncertainty over the features of
this future relationship and on the likelihood and length of the
transition period. This resulted in a set of more or less
9 The UK Government had included a provision in the WA Bill
forbidding its members to ask for an
extension of the transition period beyond the 31 December 2020.
Accordingly, the deadline for the United Kingdom to ask for such an
extension, set on 30 June 2020 in the WA, was missed.
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A review of economic analyses on the potential impact of Brexit
– Introduction: the implications of Brexit for the economic and
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14
plausible scenarios that evolved with the dynamics of the
negotiations. Figures 4a, 4b and 4c illustrate the relevant
alternatives at three different points in time.
In March 2018, at the beginning of Phase 2 (Figure 4a), a
transition period up to December 2020 had just been agreed. At that
point, the first step (no-deal/WTO outcome or transition period)
depended on whether or not the WA was subsequently approved. The
interaction between the red lines set by the United Kingdom and the
guidelines issued by the EU authorities then led to a CETA-like
future relationship being defined as the central outcome in the
final step. This did not exclude either a no-deal outcome at the
end of the transition period or an EU membership-like outcome,
should the United Kingdom opt for entering the EEA, for example.
Other outcomes were also possible (i.e. a customs union
arrangement) but were judged less relevant. This set of scenarios
was used as the basis of the analytical exercises performed in
several of the papers reviewed in Chapter 2.
Figure 4a Brexit scenarios (March 2018)
Figure 4b describes the scenarios after the extension of the
Article 50 deadline to October 2019, which delayed the starting
point of the transition to 1 November 2019. The general nature of
the alternatives did not change. In the first step, a no-deal/WTO
outcome was a distinct possibility in the event that the WA and PD
were not approved; in the event that they were approved, a
transition period would start, although the end point could
change.10 In the second step, after the exit of the United Kingdom,
the most plausible alternatives (subject to the approval of the WA
and the PD) were a CETA-like FTA, on the one hand, and the backstop
on the other. Other options – i.e. a permanent Customs Union-like
agreement – could not be ruled out.
10 As already mentioned, in December 2018 the CJEU ruled that
the United Kingdom had the right to revoke
the withdrawal notification. However, this possibility is not
included in Figures 4b and 4c.
Full EU membership
EU membership-like transition
EU membership-like outcome
CETA-like FTA
WTO/MFN(no transition)
29 March 201930 March 2019
31 December 20201 January 2021
WTO/MFN(no trade deal)
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Figure 4b Brexit scenarios (September 2019)
Finally, Figure 4c reflects the possibilities after the European
Council extended the withdrawal deadline to 31 January 2020, at the
end of October 2019. The end of the transition period remained at
31 December 2020 (with the possibility of extending it by up to two
years). On the future relationship, the new Protocol on Ireland and
Northern Ireland no longer envisages a single customs territory
(the backstop). It provides instead for a special regime applicable
to Northern Ireland only, and consequently leaves the United
Kingdom free to strike independent trade deals with third
countries. As mentioned, the final version of the PD foresees a
“comprehensive and balanced” trade agreement between the United
Kingdom and the EU; failing that, bilateral trade would revert to
MFN terms. Those continue to be the prospects during the transition
period.
Figure 4c Brexit scenarios (December 2019)
It is important to recall, as was mentioned before, that the
financial stability implications of Brexit are particularly
difficult to incorporate into macroeconomic
Full EU membership
EU membership-like transition
EU membership-like outcome
CETA-like FTA or permanent customs union
WTO/MFN(no transition)
31 October 20191 November 2019
31 December 2020*1 January 2021*
Backstop(single customs territory)
*By July 2020, possible decision to extend transition by 1 or 2
years
Full EU membership
EU membership-like transition
CETA-like FTA
WTO/MFN(no transition)
31 January 20191 February 2019
31 December 2020*1 January 2021*
*By July 2020, possible decision to extend transition by 1 or 2
years
WTO/MFN(no trade deal)
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A review of economic analyses on the potential impact of Brexit
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scenarios, although they could be quite significant in the case
of a hard Brexit.11 For this reason as well as the fact that they
were not included in the mandate to analyse the economic and trade
consequences of Brexit, those risks do not fall within the scope of
the analytical work described in the next chapter.
11 See for example, the Bank of England’s analysis published in
November 2018.
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A review of economic analyses on the potential impact of Brexit
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17
2 The economic and trade impact of Brexit
This chapter brings together the specific contributions to the
analysis of the economic consequences of Brexit contained in the
individual papers reviewed in this Occasional Paper.12
In order to present the different pieces of analysis in a more
effective way and help to extract the main lessons, which is done
in Chapter 3, the summaries of the papers are grouped into sections
relating to the main Brexit transmission channels, namely trade,
migration and FDI, which correspond to the EU fundamental freedoms:
free movement of goods, services, people and capital. Additionally,
there is a first section consisting of a literature review and a
final section containing a collection of studies on specific
countries.
Section 2.1 presents a survey of the vast body of official and
academic studies on the long-term impact of Brexit on gross
domestic product (GDP) and welfare for both the UK economy and the
EU economies (Bisciari, 2019). This paper reports a wide range of
results, depending on the model specifications and the channels of
transmission analysed in each study.
Section 2.2 is the first of two sections relating to the trade
channel. It summarises three papers analysing the increase in the
costs of trade between the United Kingdom and the EU that will
result from the reintroduction of tariffs and NTBs, taking into
account the existence of production interlinkages between the two
areas. Cappariello (2017) computes the level of tariffs that EU
firms would face in order to export directly to the United Kingdom
after withdrawal, assuming that the United Kingdom keeps the
present EU tariffs unchanged and applies them to EU exports. Byrne
and Rice (2018a, b) estimate the impact of NTBs, in particular
border checks and documentary compliance, on Irish-UK trade and on
trade between the other EU Member States and the United Kingdom.
Cappariello et al. (2018) calculate the indirect costs of Brexit
due to imposition of tariffs on intermediate and final goods,
taking into account the dense network of value chains linking the
EU and UK productive systems.
Section 2.3 includes four papers devoted to estimating the
macroeconomic impact of Brexit through the trade and migration
channels using model simulations. Pisani and Vergara Caffarelli
(2018) use a New Keynesian dynamic stochastic general equilibrium
(DSGE) model augmented with a simple GVC structure to analyse
different post-Brexit trade regimes between the euro area and the
United Kingdom. In this way they quantify the macroeconomic costs
for the United Kingdom and the euro area, which turn out to be much
larger in the first case. Campos and Timini (2019) estimate the
impact of Brexit on trade and migration flows between the EU and
the United Kingdom using gravity models. Berthou et al. (2019)
simulate different trade and migration Brexit scenarios for the EU
and the United Kingdom using the National Institute Global
Econometric Model (NiGEM) developed by the UK’s National Institute
of Economic and Social Research (NIESR); this paper finds that
Brexit is economically 12 The summaries of their content are based
on the contributions by the authors.
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A review of economic analyses on the potential impact of Brexit
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18
harmful for the United Kingdom and also, but to a much lesser
extent, for the EU. Finally, Cappariello et al. (2020) analyse the
long-term effects of Brexit on trade, welfare and prices, taking
into account EU-UK GVC interconnections. They find, again, that the
impact on the United Kingdom is significantly larger than that on
the rest of the EU.
Section 2.4 focuses on FDI: de Almeida et al. (2019) document
recent developments in FDI flows and stocks vis-à-vis the United
Kingdom, uncovering a downward shift after the 2016 referendum on
Brexit. They also use a gravity model to estimate the impact made
by the reversal of integration on FDI flows.
Country evidence is presented in Section 2.5. There are two sets
of papers that focus on Ireland and one study on Spain. Conefrey
and co-authors (2018a, 2018b, and 2019) investigate the long-run
consequences of Brexit for Ireland, the member of the euro area
(and of the EU) most exposed this economic shock. Meanwhile,
Marongiu Buonaiuti and Vergara Caffarelli (2018) analyse the issue
of the Irish border from an economic, institutional and legal point
of view, discussing the initial negotiating proposals of the EU and
the United Kingdom and the compromise solution included in the WA.
Finally, Gutiérrez Chacón and Martín Machuca (2018) investigate the
vulnerability of Spanish firms to Brexit. They conclude that
characteristics such as geographical diversification and
productivity levels may mitigate the potentially adverse impact of
the United Kingdom’s exit on Spanish firms with a presence in the
UK market.
While, in general, the various papers all describe a very
similar set of scenarios, the precise details of each scenario may
differ across the papers. All in all, the papers consider three
types of scenario, as described from an institutional point of view
in chapter 1. In the first, it is assumed that the EU and the
United Kingdom will not be able to strike a trade agreement after
Brexit. In this case, bilateral trade will be subject to the MFN
tariffs notified to the WTO, as well as NTBs. For this reason, this
scenario is called the WTO or the MFN scenario. In the second
scenario, an FTA is concluded between the United Kingdom and the
EU. Consequently tariffs, and often also NTBs, are significantly
reduced with respect to their respective MNF levels. This is
usually called the FTA scenario. Finally, some papers also consider
a no-Brexit scenario that often serves a baseline.
We refer the interested reader to the original papers for a full
description of the scenarios they use and their precise
parameterisation. For the sake of clarity, each paragraph
reiterates the main elements of the scenarios analysed.
2.1 A review of the Brexit-related economic literature
Brexit has stimulated an intense research and analysis effort in
the economics profession, leading to the publication of a large
variety of contributions on the issue.
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Bisciari (2019) surveys studies on the long-term impact13 of
Brexit on GDP and welfare14 for both the UK economy and the EU
economies. The author considers official and academic studies
published between 2016 and 2018, including some papers released
just after the EU Summit of 25 November, where EU-27 leaders
endorsed the Brexit deal concluded by Theresa May.
The main Brexit transmission channel in the long term is trade
in goods and services. Indeed, trade between the United Kingdom and
the 27 remaining EU Member States may once again be subject to
tariffs and NTBs that had been dismantled thanks to the United
Kingdom’s membership of the EU Single Market and Customs Union.
Some studies include additional transmission channels (Table 1)
such as FDI, migration, the exchange rate and the contributions to
the EU budget from the United Kingdom. Financial services are in
general considered as a service that can be traded, and financial
institutions are companies that can relocate, but financial
stability issues are largely not covered. As the focus of the
survey is on the long term, neither short-term disruptive effects
from a disorderly no-deal Brexit nor short-term uncertainties are
taken into account. A drop in productivity is also added as a
transmission channel, either as an exogenous shock or endogenously
within the models, which is relevant to the United Kingdom in
particular.
Table 1 Channels of transmission of a hard Brexit on the UK and
EU-27 economies
For the EU- 27 countries
For t
he U
K
Positive or neutral Negative
Positive or neutral EU budget
UK deregulation
Negative
FDI
Migration
Productivity shock
Trade
Uncertainties
Source: Bisciari (2019).
Studies very often show that Brexit affects the growth rate of
the economy only temporarily, while the level is affected
permanently. In empirical long-term impact studies, Brexit leads to
losses in welfare and GDP for both the United Kingdom and the EU-27
relative to a baseline scenario where the United Kingdom remains
within the EU. This does not necessarily mean that real GDP will
decline at any moment in time.
The PD on the future relationship agreed in November 2018,
together with the draft WA, left many options open for the future
bilateral EU-UK relationship. The survey, finished around that
time, encompasses various institutional post-Brexit trade scenarios
ranging from the United Kingdom remaining within the EU to an
orderly no-deal Brexit where trade relations are organised
according to WTO rules, including 13 Some studies focused on the
short term, which are outside the scope of Bisciari’s (2019)
survey,
predicted a significant immediate cost of Brexit, especially for
the United Kingdom. After initial turmoil on the UK financial
markets and a substantial depreciation of the British pound, these
predictions did not seem to materialise, partly thanks to the
policy response by the Bank of England as of August 2018, and the
delayed activation of the art. 50 TEU process, which was instead
assumed to occur right after the referendum.
14 Welfare is usually defined as either consumption or income
per capita.
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A review of economic analyses on the potential impact of Brexit
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MFN tariffs. Intermediate scenarios include FTAs, such as the
one between the EU and Canada (CETA), a customs union arrangement,
similar to that between the EU and Turkey, or United Kingdom’s
membership of the EEA, similar to Norway’s membership. The looser
the economic relationship between the EU and the United Kingdom,
the greater the autonomy for the United Kingdom to decide on
policies, but also the higher the losses attached to Brexit.
In fact, Brexit is a “lose-lose” situation for both the UK
economy and the EU economies – all the more so in an (even orderly)
no-deal scenario (WTO; Table 2).
Table 2 Long-term impact of Brexit on GDP/welfare in a WTO
scenario
Percentage point of GDP/welfare deviation from EU-like
scenario
Source: Bisciari (2019). Note: LSE (2017) = Dhingra et al.
(2017); LSE (2018) = Levell et al. (2018); IMF (2018) is a Selected
Issue of the Article IV Consultation Report on the euro area in
July; CAE (2018) = Vicard (2018); IFO (2017) = Felbermayr et al.
(2017); IFO (2018) = Felbermayr et al. (2018b); CPB (2016) =
Rojas-Romagosa (2016); KUL (2017) = Vandenbussche et al. (2017);
NIESR (2016) = Ebell and Warren (2016); NIESR (2018) = Hantzsche et
al. (2018).
The United Kingdom is found to be much more affected than the
EU-27, since the United Kingdom represents a small share of EU-27
trade, while the EU-27 still account for close to a half of UK
imports and exports. Nevertheless, estimates of the Brexit losses
vary widely from one study to another, especially for the United
Kingdom. The magnitude of the results depends on the model
specifications and on the channels considered. For the United
Kingdom, adding channels other than trade (such as FDI,
Institution Losses Channels Methodology
UK EU-27
LSE (2017) -2.7 -0.3 Trade, EU budget
Comparative static,
trade models
LSE (2018) -3.3 Trade
IMF (2018) -4.0 -0.5
CAE (2018) -2.7 -0.8
IFO (2017) -1.7 -0.3 Trade
IFO (2018) -3.2 -0.6
CPB (2016) -4.1 -0.8 Trade CGE macro model
KUL (2017) -4.5 -1.5 Trade, global value chains Comparative
static, trade model with sector-level input-output linkages
IMF (2018)
-1.5 Integration Various methods
NIESR (2016) -3.2
Trade, tariffs, FDI, EU budget
Macroeconomic model
(NiGEM)
-7.8
Idem + labour productivity shock
NIESR (2018) -5.5 Goods and services trade volumes, FDI, net
migration, EU budget + limited labour
productivity shock
UK Gov (2018b)
-7.7 Trade, new trade deals, deregulation CGE macro model (+
gravity)
-9.3 Idem + migration (zero net inflows of EEA workers)
-9.9 Trade, business investment-productivity Idem (with capital
accumulation)
UK Treasury (2016) -7.5
Trade, FDI, uncertainty persistence Back-of-the-envelope
calculations for trade
based on estimates of trade destruction and trade-income
elasticity LSE (2018) -8.1 Trade
-8.7
Trade and migration
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migration and productivity) tends to increase the negative
impact on economic activity in the long term. Higher GDP losses are
also found in reduced-form approaches, based on econometric
estimates of trade-income elasticity, or in models with imperfect
competition (increasing returns to scale, heterogeneous firms) in
comparison to models with perfect competition.
In the seven studies that analyse the economic impact of the
trade channel on individual EU countries, it is shown that small
open economies closely related to the United Kingdom are hit harder
than others (Chart 1).
Chart 1 WTO scenario losses differ across the studies, but the
ranking of countries is largely similar
Percentage point of GDP/welfare deviation from an EU-like
scenario (results from seven studies)
Notes: Countries are ranked by decreasing median GDP/welfare
losses. Losses are reported in Dhingra et al. (2017), Felbermayr et
al. (2017 and 2018b), IMF (2018b), Rojas-Romagosa (2016),
Vandenbussche et al. (2017) and Vicard (2018). In Rojas-Romagosa
(2016), results are combined for Belgium and Luxembourg; here, the
losses have been applied to Belgium and Luxembourg separately. The
wide variation for Malta (and Luxembourg) may reflect the
difficulties in the treatment of highly service-oriented economies
and possible measurement errors in the data used in the source
papers. Source: Bisciari (2019).
This is the case for Ireland – and to a lesser extent for the
Netherlands and Belgium – owing to geographical proximity, for
Luxembourg because of the specialisation in financial services, and
for Cyprus and Malta as they are small countries with Commonwealth
links to the United Kingdom.15 GDP or welfare losses are smaller in
the four main euro area countries owing to their lower exposure to
trade with the United Kingdom and their larger home markets. Higher
GDP losses are not only associated with higher values for the shock
variables (in particular NTBs), as should be expected; the results
are also sensitive to the values set for key parameters such as
trade elasticities relating trade volumes to the presence of higher
tariff and non-tariff barriers. GDP losses reported in GVC
approaches are significantly higher than in pure trade models.
15 In some service-oriented economies such as Malta, the impact
of trade barriers on financial services
does not necessarily translate fully into welfare losses, as a
significant share of services activity is carried out by
internationally oriented firms that have limited links with the
domestic economy.
-6
-5
-4
-3
-2
-1
0
IE MT
UK
LU NL
BE DK
CY
SE EU27
HU
LT CZ
BG DE
EE LV PL AT ES FR EL PT SK RO
FI HR
IT SI
MinMedianMax
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In all scenarios, the economic losses due to Brexit are
estimated ceteris paribus and assuming unchanged policies. However,
the United Kingdom could mitigate the economic losses by
implementing appropriate monetary, fiscal, trade and/or regulatory
policies, and it would regain more autonomy to do so in a WTO
scenario than in softer Brexit scenarios. It should be borne in
mind that one of the aims of Brexit is for the United Kingdom to
regain control of its borders and policies.
Reaching a trade agreement for the future relationship between
the United Kingdom and the EU could limit the GDP losses both for
the United Kingdom and the EU Member States compared with a no-deal
scenario (Table 3).
Table 3 Long-term impact of various Brexit scenarios
Percentage point of GDP/welfare deviation from an EU-like
scenario
Institution Scenario GDP / Welfare losses Tariffs Non-tariff
barriers (NTBs)
UK EU-27
LSE (2017)* WTO -2.7 -0.3 MFN 8.3 %
EEA -1.3 -0.1 Zero 2.8 %
LSE (2018)* WTO -3.3 n.a.
n.a.
MFN 8.3 %
Goods: 2.8 % Backstop -1.7 Zero
Services: 7.3 %
IMF (2018) WTO -4.0 -0.5 MFN Varying across sectors
FTA -2.5 -0.2 Zero Half of WTO
CAE (2018) WTO -2.7 -0.8 Included Derived from the
coefficients of the
gravity equation
FTA -2.2 -0.6 in NTBs
Switzerland -1.8 -0.5
EEA -0.8 -0.2
IFO (2017) WTO -1.7 -0.3 MFN Gravity EU/UK coefficient
FTA -0.6 -0.1 Zero South Korea coefficient
FTA and a CU -0.4 -0.1 Zero Idem minus 5 % NTB for goods
EEA -0.4 -0.1 Zero As FTA minus 50 %
IFO (2018) WTO -3.2 -0.6 MFN Gravity EU/UK coefficient
FTA -1.8 -0.3 Zero South Korea coefficient
CPB (2016) WTO -4.1 -0.8 MFN Average : 12.9 %
FTA (2029) -3.4 -0.6 Zero Average : 6.4 %
KUL (2017)
WTO
EEA
-4.5
-1.2
-1.5
-0.4
MFN
Zero
8.3 %
2.8 %
Source: Bisciari (2019). Note: papers are quoted as in Table 2.
CU stands for a Customs Union. * LSE studies (2017 and 2018) also
feature the loss of benefits from further EU27 integration.
If the new relationship were of an FTA type, like the one
between the EU and South Korea, the losses in general would be less
than half those in a no-deal scenario (Table 4); if the United
Kingdom remained in the Single Market or the Customs Union, the GDP
losses would be significantly smaller again.
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Table 4 GDP losses in various Brexit scenarios
Deviation from EU-like scenario, in percentage points
WTO (South Korea like) FTA FTA and customs union EEA
Ireland -2,03 -0,88 -0,77 -0,52
UK -1,73 -0,57 -0,36 -0,4
Malta -1,65 -0,71 -0,23 -0,46
Luxembourg -1,4 -0,46 0,02 -0,37
Cyprus -0,51 -0,23 -0,13 -0,15
Belgium -0,46 -0,2 -0,14 -0,13
Netherlands -0,44 -0,21 -0,15 -0,14
Slovakia -0,35 -0,23 -0,19 -0,15
Denmark -0,31 -0,16 -0,12 -0,1
Poland -0,27 -0,14 -0,12 -0,08
EU-27 -0,26 -0,11 -0,09 -0,07
Sweden -0,26 -0,12 -0,09 -0,08
Hungary -0,24 -0,09 -0,08 -0,06
Germany -0,23 -0,1 -0,09 -0,06
Czech Republic -0,23 -0,09 -0,09 -0,06
Estonia -0,23 -0,11 -0,1 -0,07
Latvia -0,22 -0,1 -0,08 -0,06
Lithuania -0,21 -0,11 -0,1 -0,06
Bulgaria -0,2 -0,11 -0,1 -0,08
France -0,19 -0,09 -0,07 -0,06
Finland -0,17 -0,07 -0,06 -0,05
Portugal -0,17 -0,08 -0,07 -0,05
Spain -0,15 -0,07 -0,06 -0,04
Italy -0,15 -0,07 -0,06 -0,04
Greece -0,13 -0,07 -0,05 -0,05
Romania -0,13 -0,07 -0,05 -0,04
Slovenia -0,13 -0,07 -0,05 -0,04
Austria -0,11 -0,05 -0,04 -0,03
Croatia -0,11 -0,06 -0,05 -0,04
Source: Bisciari (2019), based on Felbermayr et al. (2017).
Note: Countries have been ranked by decreasing WTO GDP
losses.).
Estimates of the effects of the agreement reached in November
2018 show that a significant share of the economic loss that would
occur in a WTO scenario would not materialise for the United
Kingdom either in the backstop scenario or in a free trade area for
goods combined with an FTA for services, as foreseen by the 2018 PD
(Chart 2). This explains the economic interest for the United
Kingdom and the EU in parting under an agreed future relationship.
The revised PD of October 2019 also points to an FTA as the
intended model for the future relationship.
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Chart 2 Expected mitigating impact of the November 2018 deal on
Brexit losses for the United Kingdom in a no-deal scenario
Percentage point of GDP/welfare deviation from an EU-like
scenario
Note: NIESR: simulation for the period until 2030. Source:
Bisciari (2019).
2.2 Estimates of tariff and non-tariff barriers to trade after
Brexit
This section summarises three papers that mainly use statistical
accounting techniques to analyse quantitatively the rise of tariff
and non-tariff barriers to trade after Brexit. The papers also take
into account how the dense network of trade interlinkages between
the United Kingdom and the EU through production value chains would
contribute to increasing the costs of withdrawal.
2.2.1 Tariff costs for EU countries in a new trade regime with
the United Kingdom
The study by Cappariello (2017) estimates the average tariffs
that producers of each of the remaining 27 EU countries would face
when exporting to the United Kingdom in the event that a trade
agreement is not reached in the Brexit negotiations, and trade
between the EU and the United Kingdom is conducted under WTO MFN
terms. Under this scenario, the United Kingdom would introduce
tariffs on its imports from the EU-27; the impact on average
tariffs would depend both on the intensity of the import
relationship of each EU-27 country with the United Kingdom and on
the sectoral composition of the import flow.
Cappariello’s analysis is based on the assumption that the
United Kingdom would apply MFN tariff rates equal to the EU’s
current MFN rates on its imports from the EU-27 countries. The
hypothesis that, at least at the beginning, the United Kingdom
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-2
0
Orderly no-deal Deal + FTA Deal + Backstop White Paper White
paper +50% NTB
No-deal
NIESR UK government
TradeNew trade dealsFDIMigration
ProductivityDeregulationTotal
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will inherit the EU’s tariff schedule is indeed plausible since
the adoption of a new tariff schedule within the WTO would entail a
protracted process.16 Under this hypothesis, the study estimates
that the average duty imposed by the United Kingdom on imports of
goods from the EU-27 would be 5.2%, whereas the duty levied on UK
exports to the EU would be equal to 3.9% (Table 5).
Table 5 Estimated bilateral tariffs between the United Kingdom
and the EU-27 by sector
Percentage of imports
SITC Rev.4 Product
Bilateral simple average of MFN (2015) Import sector share
on EU-27 goods
on UK goods
UK from EU-27
EU-27 from UK
0.0 Food and live animals 15.0 12.0 10.4 6.6
1.0 Beverages and tobacco 8.1 5.4 1.9 1.8
2.0 Crude materials, inedible, except fuels 1.9 0.5 2.1 1.9
3.0 Mineral fuels, lubricants and related materials 1.8 1.1 3.4
12.8
4.0 Animal and vegetable oils, fats and waxes 3.9 3.6 0.4
0.3
5.0 Chemicals and related products, n.e.s. 2.4 2.7 16.3 18.0
6.0 Manufactured goods classified chiefly by material 2.8 2.6
10.8 11.0
7 net of 7.8 and 7.9
Machinery excluding road vehicles and other transport equipment
2.0 1.9 20.8 19.0
7.8 Road vehicles 9.1 9.0 18.9 12.3
7.9 Other transport equipment 2.6 2.5 1.8 3.8
8 net of 8.4 and 8.5
Miscellaneous manufactured articles excl. clothing and footwear
2.2 2.4 9.2 8.7
8.4 Articles of apparel and clothing accessories 11.0 11.0 2.1
1.6
8.5 Footwear 10.0 11.0 0.8 0.5
9.0 Commodities and transactions not classified elsewhere in the
SITC - - 1.1 1.7
Total 5.2 3.9 100.0 100.0
Source: Cappariello (2017).
It is clear that the EU MFN tariffs substantially protect four
sectors: food and live animals, beverage and tobacco, road
vehicles, and clothing and footwear. European car exports to the
United Kingdom would carry the highest costs in absolute terms: EU
road vehicle producers would have to deal with the impact of
tariffs worth €5.3 billion. In other industries, notably machinery
and chemicals, both representing a significant share of UK imports
from the EU-27, the level of tariffs would instead be quite low.
Considering that road vehicles represent almost one-fifth of the
value of goods delivered by the EU-27 to the United Kingdom, and
given that the average tariff on road vehicles is 9.1%, the new
regime could significantly affect the average tariff faced by
European exporters, with a potential negative impact on sales to
the United Kingdom. 16 In May 2020, the UK Government published a
proposal that implied lower tariffs than the current EU MFN
tariffs for trade after Brexit. The estimates in Cappariello
(2017) can therefore be considered an upper bound.
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In addition, the different composition of exports by sector
means that there is a large degree of heterogeneity in average
tariffs across EU-27 members. Chart 3 presents the average tariff
that would be imposed on goods imported by the United Kingdom from
each of the 27 remaining Member States. In the case of half of
these countries, the average tariff would be higher than 5% of the
value of goods exported to the United Kingdom. For a subset of
economies – Germany, Spain, Belgium and Slovakia – this is due to
specialisation in the road vehicles industry. In other cases, such
as Portugal and Romania, the high average tariff is almost fully
explained by the relatively high incidence of clothing industry
exports. Meanwhile, the share of specific food and live animal
products in exports explains the high tariffs that would weigh on
goods imported from Ireland and Denmark (meat), Greece (vegetables
and fruit) and Cyprus (dairy products). For Spain, exports to the
United Kingdom predominantly reflect specialisation in the road
vehicles industry, but the relatively high level of tariffs also
derives from the high incidence of trade in agricultural products
(particularly vegetables and fruit). The estimated average tariffs
that would apply to French and Italian goods exported to the UK
market would be just below the EU-27 average.
Chart 3 Average tariffs on UK imports of goods from EU-27
countries
Percentage average tariffs as a share of import value
Note: The dotted line is the EU-27 average. Source: Cappariello
(2017).
In terms of the percentage of the total value added of the
manufacturing sector (Table 6), the relative burden of the new
tariffs on the goods imported by the United Kingdom would be
particularly high for smaller EU states that have geographical
proximity and/or historical ties with the United Kingdom, such as
Belgium, Cyprus, Ireland and the Netherlands. This confirms that
the stakes in the negotiations with the United Kingdom are not the
same for all European countries. This could affect EU positions in
the negotiation of future trade agreements.
0 2 4 6 8 10 12 14
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HUBGFRITLTDEBEROPLDKESPTGRIE
SKCY
EU-27 5.2
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Table 6 Estimated tariffs on UK imports of goods from EU-27
countries
EUR millions and percentages
COUNTRY
EU-27 goods in % of value added in
manufacturing Value of tariffs Value of imports Average
tariff
Austria 162 4,212 3.8 0.3
Belgium 1,542 27,959 5.5 3.1
Bulgaria 24 507 4.8 0.5
Croatia 8 196 4.2 0.2
Cyprus 29 215 13.0 3.5
Czech Republic 283 6,609 4.3 0.8
Denmark 298 4,736 6.3 1.0
Estonia 3 257 1.3 0.1
Finland 50 2,790 1.8 0.2
France 1,710 34,317 5.0 0.9
Germany 4,484 84,187 5.3 0.9
Greece 80 967 8.3 0.8
Hungary 161 3,441 4.7 0.8
Ireland 1,415 17,075 8.3 3.8
Italy 1,117 22,256 5.0 0.5
Latvia 10 657 1.5 0.5
Lithuania 54 1,069 5.1 1.6
Luxembourg 18 667 2.7 0.7
Malta 8 250 3.3 -
Netherlands 1,787 42,315 4.2 3.0
Poland 677 11,114 6.1 1.2
Portugal 212 3,124 6.8 1.2
Romania 128 2,132 6.0 0.8
Slovakia 243 2,755 8.8 2.1
Slovenia 19 446 4.3 0.3
Spain 1,236 19,146 6.5 1.3
Sweden 262 9,311 2.8 0.5
EU-27 16,112 309,183 5.2 1.1
Source: Cappariello (2017) Notes: UK imports from the EU-27 are
drawn from the ComTrade database. These values are in US dollars
and have been converted into euro using an annual average exchange
rate of €1 = USD 1.1095..
2.2.2 The impact of non-tariff barriers on goods trade
Membership of the EU brings two important levers of trade.
First, the EU Customs Union implies the absence of tariffs and
customs checks between Member States. Second, membership of the
Single Market guarantees that NTBs are minimised. In
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particular, there are EU-wide agreements on product standards
and rules of origin. This means that firms which import goods from
outside the EU can then trade those goods across borders within the
EU without being subject to additional checks. Upon leaving the EU,
the United Kingdom will no longer be party to these agreements, so
there is likely to be a significant increase in NTBs. Byrne and
Rice (2018a, b) assess the impact of NTBs (in the form of delays
associated with border checks and documentary compliance) on trade
with the United Kingdom.
Border delays and NTBs have been shown to be a potentially
larger barrier to trade than tariffs (Hummels 2007; Hummels and
Schaur 2013). The importance of NTBs in the negotiations on CETA
highlight their role as the most significant impediment to trade in
developed markets with low tariffs. NTBs reduce trade through two
main channels. First, they can increase the cost of doing business.
Some NTBs of this kind are quite specific – such as adherence to
individual product standards – while others are more general – such
as more stringent customs and documentary related procedures.
Second, NTBs can restrict full access to markets (as in the case of
quotas). The specific effect of a post-Brexit increase in NTBs on
EU trade with the United Kingdom has received comparatively little
attention.
For EU Member States conducting trade with the United Kingdom,
an increase in NTBs after Brexit could reduce trade in two ways.
First, outside the Customs Union, UK importers would be exempt from
adherence to EU regulatory standards on goods imports from non-EU
countries. This would harm the competitiveness of European
exporters selling EU-compliant goods to the UK market. Second,
under any scenario, delays associated with increased customs
handling times and documentary compliance requirements will exceed
those experienced under the current arrangement of frictionless
trade and will therefore increase costs for EU exporters. While the
extent of checks at the UK border is not yet clear, the Union
Customs Code17 sets out procedures required for EU exporters when
exporting to a third country. These procedures include declarations
at point of export, outward customs arrival, outward clearance,
import, inward customs arrival and where goods consignments must be
held in temporary storage. In addition to this paperwork, goods are
required to pass UK customs inspection procedures and are likely to
be subject to additional handling delays due to the increase in the
volume of imports subject to such procedures.
In their analysis of the effect of potential increases in border
delays and documentary compliance on trade between Ireland and the
United Kingdom after Brexit, Byrne and Rice (2018a) measure NTBs as
the sum of border waiting time and the time needed to complete all
documentary compliance, as reflected in the “Trading Across
Borders” module of the World Bank’s Doing Business survey.
Estimating the effect of potential increases in NTBs on trade
requires two ingredients: the elasticity of trade to NTBs for
high-income countries (both in aggregate and at the goods level)
and an estimate of the likely increase in NTBs at the EU/UK border
after Brexit. To estimate this elasticity, a difference gravity
model and a standardised measure of NTBs from the Doing Business
survey are used. The model relates the volume of trade to the level
of NTBs, controlling for distance, exchange rates and other
variables that traditionally
17 Regulation (EU) No 952/2013 of the European Parliament and of
the Council of 9 October 2013 laying
down the Union Customs Code (OJ L 269, 10.10.2013, p.1).
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determine the volume of trade. This methodology is similar to
that used by Djankov et al. (2010).
The estimate of the potential increase in border waiting times
comes from a regression that assesses the impact on NTBs of doing
trade with a country outside one’s own free trade area, controlling
for whether trade is carried out through a sea border, as well as
for income per capita and trade openness. This model suggests a 90%
increase in NTBs for countries trading with the United Kingdom
compared with the status quo. Of course, this is only an estimate
of the likely increase in NTBs at the EU/UK border. The scale of
the increase will be heterogeneous across countries and goods.
However, the model provides a framework to assess the impact of any
given increase in NTBs, in combination with the elasticity
estimated in the first step.
Should the United Kingdom leave the EU Customs Union, trade
between Ireland and the United Kingdom would decline by 9.6% as a
direct result of an estimated increase in these delays at the
border. In particular this equates to a 1.4% decline in total Irish
exports and a 3.1% decline in total Irish imports under the current
composition of trade between the two countries (Chart 4). Fresh
foods, raw materials (such as metals and some intermediate inputs
into firms’ supply chains) and bulky goods are most exposed to
delays (Charts 5 and 6). Finally, trade in petrol and other fuels
and in chemicals and related goods does not appear to be exposed to
delays.
Chart 4 Effect on aggregate exports and imports
Share of total exports/imports (2015)
Source: Byrne and Rice (2018a).
11.02% 87.75% 11.67% 87.02%
1.24%
0.00%
1.31%
0.00%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
UK Rest of World UK Rest of World
Exports Imports
Remaining trade shareNTB impact
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Chart 5 Sectoral effect on Irish imports from the United
Kingdom
Share of imports from UK
Source: Byrne and Rice (2018a).
Chart 6 Effect on Irish exports to the United Kingdom by
sector
Share of exports to UK
Source: Byrne and Rice (2018a).
Byrne and Rice (2018b) apply this approach to all EU countries.
Again, the extent to which countries are affected by increases in
NTBs after Brexit depends on the volume and type of goods they
trade with the United Kingdom. Chart 7 presents the predicted
declines in exports to the United Kingdom (as a fraction of total
exports) at the goods level for all EU countries, the EU as a whole
and the euro area.
0%
5%
10%
15%
20%
25%
30%
Remaining UK shareNTB impact
0%
5%
10%
15%
20%
25%
30%
Remaining UK shareNTB impact
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Chart 7 Predicted decline in exports to the United Kingdom
(percentage of total exports)
Source: Byrne and Rice (2018b).
Latvia appears most exposed to border delays owing to its
significant UK exports of crude raw materials (in particular
timber), goods that are highly sensitive to delays given their role
as intermediate inputs into supply chain networks and the fact that
they are often perishable (Chen et al. 2018). The effect for
Ireland is largely driven by its exports of fresh foods and
manufacturing materials. Croatia and Slovenia appear least exposed.
This is due to both the overall share of the UK market in their
total exports and the small quantity of their UK exports identified
as being time-sensitive.
2.2.3 EU-UK global value chain trade and the indirect costs of
Brexit
The indirect effects of trade tariffs working through the
complex network of production linkages between countries (known as
global value chains, or GVCs) have often been neglected in the
Brexit debate. Nevertheless, these effects are likely to be highly
significant given the strong cross-border production integration
between the two economies. Tariffs on imported intermediate goods
(embedded in exported goods) will cumulate as many times as the
intermediates cross the EU-UK border. Furthermore, a significant
share of exports of goods and services reaches destination
countries only indirectly through other countries’ exports. These
exports are therefore subject to trade costs that are not
immediately evident (Italian intermediate exports to Germany
incorporated in German goods destined for the UK market would be
subject to tariffs while crossing the Channel, but this might not
be obvious to Italian exporters).
Measuring the interconnections between countries and sectors is
not an easy task. In fact, traditional trade statistics cannot
provide an adequate representation of supply and demand linkages.
Cappariello et al. (2018) make use of the World Input-Output
Database (WIOD) (Timmer et al., 2015) to map production and
consumption linkages between the two economies. Combining these
data with new analysis tools (Borin and Mancini, 2017), the authors
provide a measure of the cost of trade that takes into account the
whole EU-UK GVC structure. The analysis is a static impact
assessment
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
Fresh food Beverages and tobaccoCrude raw materials Animal and
vegetable oils and fats
Manufacturing materials Machinery and transport Misc.
manufactured
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that does not consider how trade between the two regions will
evolve owing to the introduction of tariffs (and NTBs).
The working assumption is that, in the post-Brexit EU-UK
relationship, the United Kingdom would adopt the EU’s current MFN
tariff schedule (a worst-case scenario). In other words, it is
assumed that UK goods exports will be subject to the tariffs
currently applied by the EU (and the United Kingdom) to partners
with which there is no specific trade agreement. To this end, a
tariff schedule both for the EU and the United Kingdom is
constructed at the sector and end-use levels using the MFN tariff
rates. The United Kingdom in fact announced in May 2020 that UK MFN
tariffs will be lower than the current EU MFN tariffs. Should this
be confirmed, the results would represent an upper bound for the
actual economic effects.
The calculated tariff schedule for both the EU and the United
Kingdom is fed through the constellation of GVCs described in the
WIOD in order to assess the associated trade costs of Brexit,
including the full extent of the magnification due to the deep
sectoral/country interlinkages (Table 7). The analysis (based on
the methodology proposed by Miroudot et al., 2013) estimates that
the impact on producers is much higher for the United Kingdom,
where total (domestic and foreign) manufacturing input costs would
increase by around 0.9 percentage points on average, while in the
EU the increase would be marginal (0.1 percentage points). This
result is due to the specific links between the two regions: around
one-fifth of the total manufacturing inputs used by the United
Kingdom come from the EU, while only 1.5% of total EU inputs are
imported from the United Kingdom. In the United Kingdom, the
sectors mostly involved in the EU-UK GVCs, such as motor vehicles
and chemicals, would experience the largest effect. Finally, in the
EU, the impact on production costs would be high in Ireland, owing
to its proximity and interconnectedness with the United Kingdom,
and close to or lower than the average in the larger EU Member
States.
Table 7 Total effect of tariffs on production costs
Percentage of total costs for inputs, domestic and imported
UK 0.86
Motor vehicles 2.97
Chemicals 2.22
Rubber and plastic 1.53
EU-27 0.08
Ireland 0.96
Germany 0.08
France 0.07
Spain 0.04
Italy 0.04
Source: Cappariello et al. (2018).
Table 8 shows the average tariffs that would be imposed on EU
imports from the United Kingdom in manufacturing as a whole and in
some specific sectors. The total tariff cost is 4.3%, and the share
of the indirect tariff component, i.e. the tariff costs
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deriving from the existence of value chains, is 10% of the
total; this is the effect of tariff accumulation due to
back-and-forth trade across the Channel. Similarly, Table 9
presents the total tariff cost for UK imports from the EU.
Table 8 Tariff magnification effects on EU imports from the
United Kingdom
Percentage of the value of imports
EU imports from UK Direct tariff Indirect tariff Cumulative
tariff
Average 3.88 0.42 4.3
Motor vehicles 8.24 0.94 9.18
Chemicals 4.05 0.82 4.86
Rubber and plastic 5.3 0.61 5.91
Source: Cappariello et al. (2018). Note: CT stands for cumulated
tariff.
Table 9 Tariff magnification effects on UK imports from the
EU
Percentage of the value of imports
UK imports from EU Direct tariff Indirect tariff Cumulative
tariff
Average 5.93 0.07 6
Food products 17.65 0.18 17.83
Crop and animal 5.51 0.13 5.64
Chemicals 4.38 0.08 4.46
Source: Cappariello et al. (2018). Note: CT stands for cumulated
tariff.
The indirect tariffs due to GVCs are significant for European
importers but not for those of the United Kingdom. European
producers perform processing stages in the United Kingdom to a
larger extent than UK producers do so in Europe. Therefore, the
magnification of the tariff burden due to products crossing the
Channel at different production stages weighs more on EU producers:
for UK exports to the EU, the share of value added produced in the
EU is around 9%, while for EU exports to the United Kingdom, the UK
value added share is just 2%. As shown in Chart 8, the amount of
indirect trade costs is positively correla